Good morning and welcome to the Provident Financial Services third quarter earnings conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Leonard Gleason, Investor Relations Officer. Please go ahead.

Thank you, Carrie. Good morning, ladies and gentlemen. Thank you for joining us on this humble morning. The presenters for our third quarter earnings call are Chris Martin, Chairman, President and CEO; and Frank Muzio, our Senior Vice President and Chief Accounting Officer, who is pinch-hitting for our CFO, Tom Lyons, who is unavailable to join us this morning. Before beginning the review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call. Our full disclaimer can be found in the text of this morning's earnings release, which has been posted to the Investor Relations page on our website, providentnj.com. Now, I'm pleased to introduce Chris Martin, who will offer his perspective on our third quarter financial results. Chris?

Thanks, Len, and good morning, everyone. Provident's core results were strong with net income of $20.6 million or $0.33 per share versus $0.30 for the same period in 2014. The quarterly earnings shortfall from the trailing quarter is entirely due to volatile items, such as loan prepayment fees, low-level interest rate swap fees, minimal gains on security sales and lower gains on loan sales, primarily due to lower volume. Our return on average assets was 93 basis points for the quarter versus 90 basis points from the prior period last year, and return on average tangible equity was 10.93%. On a year-to-date basis, net interest income totaled $186.1 million versus $175.6 million for the same period in 2014. Net income totaled $62.2 million versus $52.4 million for the nine months ended September 30, 2014. Return on average assets was 96 basis points versus 89 basis points for the prior year's first nine months. Net interest margin pressures continued with an additional decrease of 4 basis points in the quarter to 3.13%, as the Fed continues to maintain a zero interest rate policy. Delay by the Fed in raising rates will likely constrain growth in our net interest income and our net interest margin will remain under pressure, as interest rates continue at historical lows. During the quarter, loan originations were skewed more towards fixed rates than in previous quarters, with no loan-level swaps and 61% adjustable rate credits being put on the books versus 77% last quarter. We continue to seek loan swaps for any deals beyond seven years, but competition is offering longer-terms and fixed rates. As a result, the average new loan origination rate increased to 3.75% from 3.17% last quarter. The weighted average yield on the interest earning assets decreased 5 basis points, while the decline in…

Thank you, Chris, and good morning, everyone. Our net income for the third quarter was $20.6 million compared to $21.8 million for the trailing quarter. Earnings per share were $0.33 compared with $0.35 for the trailing quarter. As Chris discussed earlier, the decline in net income from the trailing quarter was largely due to a reduction in certain non-interest income items that by their nature are difficult to predict, heavily influenced and heavily influenced by customer behavior, especially fees from our loan-level swap program and prepayment fees on loans. The fundamental activities of the company continue to perform well. Net interest income increased by $873,000 to $62.5 million, as benefit of $8.5 million annualized increase in average of loans outstanding more than offset the 6 basis point decline in our average loan yield. The net interest margin declined 4 basis points to 3.13%, while the average yield on earning assets declined 5 basis points to 3.66%, and the yield on interest bearing liabilities decreased 2 basis points to 65 basis points. The cost of deposits was unchanged for the quarter at 25 basis points and our non-interest bearing deposit increased 19% annualized, and provided $1.4 million for loan losses this quarter compared to $1.1 million in the trailing quarter, as the increased allowance requirements for the quarter were primarily a function of loan growth. Non-performing loans decreased $6.4 million from the trailing quarter to $36.9 million or 62 basis point of total loan. Total delinquencies fell to 94 basis points of loans and the weighted average risk rating of the portfolio remain stable. Net charge-offs for the quarter decreased $560,000 on annualized 4 basis points of average loans compared to 17 basis points for the prior quarter. The allowance for loan loss to total loans decreased to 94 basis points…

[Operator Instructions] Our first question comes from Mark Fitzgibbon of Sandler O'Neill.

First question is on that other income line. It was a negative $122,000 this quarter. What caused it to be negative? Could you break the items out in that?

Yes, basically, Mark, it was a credit valuation adjustment on the swap portfolio.

And then secondly, it look like you guys really squeezed expenses in the third quarter and came in below your $45 million run rate guidance. Is it sustainable operating expenses you think down close to this level?

Mark, we ran that out and looked at where we're going to be projecting going forward. We are looking at probably about $44.5 million on a go-forward basis.

And then your capital continues to build. You're getting close to sort of 9%. Could you share with us your target longer-term and also maybe what you might do with some of that excess capital? I assume the dividend increase was part of that?

Certainly, the dividend increase was part of that consideration. Absent though, what going on in Washington on regulatory-wise, obviously, regulators love to see more capital. On the backside, we want to make sure we're utilizing it affectively. So I think we will be looking at opportunities certainly to grow our business, which is what we to do. So that's a primary use of our capital. Payout ratio is at 51%. We don't see them going too much higher, but you never know how we're going to return value to shareholders. 9% is a little high from what I would consider. And I think 8% and 8.5% in this environment is probably more applicable. So we'll continue to look at that as opportunities present themselves.

And also, I wonder if you could help us think about the margin for the next quarter or two, what your thinking is?

Well, you know where the rates are and where the curve is or isn't. We would look at probably another couple of basis points in the fourth quarter and maybe 2 more in the first quarter, absent any kind of things going on in the market. But I think we level off at that point.

And then lastly, we've obviously seen some deals recently in your backyard. What do you think is pushing banks to sell? Do you think regulators are becoming more receptive to deals? And do you think PFS is likely to be a buyer of banks in the coming quarters?

Well, probably can't do anything on the last comment there, but we certainly have seen what's going on. I think, regulators open-will will see those are two very large deals that were announced, and they seemed to be problematic in the past. So it will be interesting to see the timing of those. I think everybody realize that it's getting harder to make a dollar and the cost keep coming up from a regulatory standpoint, and making sure that we're returning really good value to shareholders. So I think it all plays into it, which would mean there has been a lot more conversation of late than what had been maybe two years ago. So I think everybody is looking at their budgets and saying, this is not going to get any easier, no matter what the Fed does.

Our next question comes from Collyn Gilbert of KBW.

I'm going to just follow-up with Mark's first question. So the swap adjustment, what was the dollar amount of that?

I think its $200,000.

And then also what was the prepays? Can you remind us what the prepays were this quarter and what they were last quarter, prepay income?

Well, I'll go back to I guess, September 14, $983,000. In September, they were of this quarter, it was $636,000. June was $1.3 million. So that's really lost by $680,000 and obviously the other side of that, Collyn, is that around the portfolio it gets to grow, and we hold on to loans, which I think is probably more important than just getting prepayment fee.

And then just on the reserves, can you remind us again of what the total, including the credit marks, what your total reserve is? I guess, I would have thought maybe you were kind of in a position where you could sort of grow into the reserve versus adding to it. Just maybe talk about kind of those two points.

Well, as you know, it comes in, in different areas. I think we're going to see a little bit of prepayments in the fourth quarter, little bit above where we had seen them in third. And also swaps, I know we have a couple of deals that should close, which will bring that number back up slightly. We don't predict it. The idea of having the swap makes sense for us from an asset liability standpoint. It gets your fee income. On the other hand, if you sold the volume of fixed rate production we had this quarter, it helped our margin a little bit to be sustained. So putting on swaps, it's a very low rate environment. They don't provide you with the yield, but they certainly will be if rates go up, I think we'll see more in the fourth quarter than we certainly did in the third quarter.

And then just on the reserve, can you remind us again of what the total, including the credit marks for your total reserve is? I guess, I would have thought maybe you're kind of in a position where you could sort of grow into the reserve versus adding to it, just maybe talk about kind of those two points.

Certainly, we look at our stress testing and look at our credit marks conservatively, yet following GAAP. We did see just the increase was due to purely the volume, and so our methodology does not change at all. It is really related to the volume that's going on. Certainly asset quality has gone better, but the metrics that we put on, that's really support where we are and where the dollars put aside.

Do you have handy what the total marks are? I mean, if you think about the total reserves inclusive of the marks on team?

I don't have that handy. I can get it to you, Collyn.

And then just on the deposit side, how do you think about kind of future deposit costs? Do you think you can kind of hold the line in here, and obviously I guess the balance of that would be continuing to add more on the non-interest bearing side, or how do you see that sort of trajectory moving over the next few quarters or so?

You've been following a lot of companies and their earnings announcement. Deposit growth has been a challenge for most of the institutions, if they have grown, its' usually with due to the municipal side or a special large surrogate type of accounts. The consumer is not really running to the bank saying, I can't wait to get 10 basis points on my savings account. So I think the consumer is kind of not really going to be involved in this. So do I think we can hold serve? I think we have to defend our market and the people that are out there with the right levels of rates to be able to offer to our customers before they get taken by other companies, albeit that some of the specials that are out there, I think everybody is wise to that. And going from 1% to 1.3% does not move the needle for a lot of customers. They're not going to go shifting their accounts except for hot money. So deposit growth, we look at our commercial business and what we get in the way of corporate cash management products, and certainly, the non-interest bearing is coming from that C&I business and certainly the Asset-Based Lending Group. So we're going to continue to go that route. I'd love to see deposit flow stronger. We're making some headway out in the Pennsylvania markets, albeit slow. Just holding serve and maintaining our incumbency status for most of our depositors is what we want to do.

And just on that point too, Chris, like you've mentioned in your opening comments, as new competitors come into the market you'll try to ward them off. Do you have any sort of strategy in place to either take some of the -- and I'm just going to run with M&T, is there opportunities from the disruption with [indiscernible] like just you know kind of what you guys are doing to really try to target some of that customer fall out.

The answer would be yes on both fronts. We don't wish anybody bad things, but obviously we think that we could be in there and offer products that maybe their customers were used to and that's something that we're prepared to do.

And then my last question, do you want to comment at all on your thoughts on some of the recent M&A that's gone on in the market; opinions, thoughts?

I won't hold judgment at all. I think it's just the companies both had -- the two large ones have had certain issues that I'm sure they have to look at compared to the market expectations. So I think we'll just benefit from some of the dislocation that will happen, albeit that most of them aren't in our market specifically.

So it doesn't change necessarily the way you're thinking about M&A yourself?

No.

Our next question comes from Matthew Kelley of Piper Jaffray.

Just going back to the credit valuation adjustments on the swaps there, what was that related to specifically in terms of an industry or the type of loan we need to make that adjustment from a credit perspective?

It's really just a function of interest rate, Matt.

Nothing, in terms of --

Yes, there's nothing related to the problems with swap or counterparty or anything of that nature, it's just the interest rate environment.

And then what was the AUM balance at the end of the period?

Pretty sure, it was about the same where we were. We did not lose many clients in the way of assets under management for whatever ones we get. The only thing you probably had was the mark down and it's about $2.4 billion. Certainly, the market got hit, so everything moves down accordingly. It has since recovered slightly. So if you look at the way the market went down, 4% or 5%, it's recovered probably 3% of that already, so it's still in that area, $2.4 billion.

And then, Chris, in your travels, just sitting down with your customers and your borrowers, how would you rate the financial condition of those customers today versus a year ago? I mean, is it still getting better or are they facing headwinds in their own sales? What are you hearing from commentary just from your borrowers on the state of the economy there? Maybe just give us a sense of how things are today versus maybe six or 12 months ago.

Well, certainly I think that it's stabilized. Some of them are starting to actually spend the money in the plant equipment, so the CapEx is coming, albeit in a slow manner. Industry specific certain ones are doing even better. Certainly, industrial space is doing fairly well. A couple of businesses in the pharmaceutical side are doing very well. And yet you have some other that are getting through. They'd love it to be better. There is other vacancies; nothing dramatic, but certainly you're seeing a couple of clients here, they are just struggling to unnecessarily make all the numbers, but to maintain. Things are slowing slightly in certain markets. But for the most part, I think they're all -- everybody harkens back to the day six years ago or something. And guess what, that world is over. I think they're all learning to do more with less and the luxuries that they had back went in the way of a lot of latitude in their volumes have slowed up a little bit, but I think overall our financial wherewithal of our commercial clients is doing very well. Consumer business is certainly still slow, albeit the residential world is picking up, but it's certainly not on the refi area, it's more of a new home purchase or resell.

Then just two other questions in the model here, what was the pipeline yield? The number you've given in the past, on conference calls. Your $1.2 billion unfunded commitments, what was the yield on that?

That's about 3.47% of which that fixed is about just under kind of about 40%, the variable is about 60%.

And then last question, just balance sheet composition, earning asset mix. Securities balances have been coming down 1% or 2% a quarter. Is that going to continue at the same type of pace as you shift cash flows from securities into the loan production?

I would say it's going to kind of stabilize, Matt, because of the fact that liquidity and all of the things related to that with regulations. You have to maintain certain items. So we're probably going to keep that portfolio in that area, give or take a percent here and there, but it certainly not going to be running down to 10% or 9%, because of our liquidity things you have to put out there. So we'd certainly rather put it out in loans or better return than a mortgage-backed security or a treasury obligation, but for the most part I think we're in the range we stated. The lowest we'd go is about 15%.

And next we have a follow up from Mark Fitzgibbon of Sandler O'Neill.

Just one follow-up, what was the swap fees in the quarter? I think it was $2.1 million in the second quarter?

Mark, there were no swap fees in the current quarter.

Our next question is a follow-up from Collyn Gilbert of KBW.

Just one more. Can you just update us on your thoughts on the $10 billion and incremental expenses, what you're putting to work? I know you kind of indicated it earlier in your comments, but just sort of quantify that and remind us of the timing in which you think it would be before you cross it.

I certainly think that we're spending a few bucks. Certainly we did with systems to make sure that our stress testing can be utilized certainly through our loan portfolio. That has been done. Right now, if you look at for 2016, between $250,000 and $300,000 would be the cost that we think of more in the way of preparing for the best making sure we have the right modeling in place and certainly looking at our policies, because you can't just take which you had. You had to move them up and make the fill the gap analysis. So we look at a consultant in that regard. Absent Washington, which I'll down there this week coming out to talk about legislation that might be able to move that out, I don't hold that hold my breath, but I certainly hope if there is an opportunity and I think the regulators agree that some of the things that are being put on institutions of our size and even some that are little bit bigger or a little bit over the top, but we want to make sure that we at least have the voice, see if we can get some of the regulations modified.

And any thought on timing? I mean it just continue to think about the organic gross pace sustaining at this level and then however you're across there?

That would definitely be it. Right now, we don't put in there and put a deal in there, but again if it's a right deal for our shareholders, and it's priced correctly, we'll go through that. And everybody kind of knows what's going to happen. But that [indiscernible] go as organically, we've modeled it out, we would not get that number, to the earliest would be 2017, just because of normal cash flow run off of pipelines and the portfolios.

This concludes our question-and-answer session. I would now like to turn the conference back over to Christopher Martin for any closing remarks. End of Q&A

So we thank you and we look forward to concluding 2015 on the high node. And we'll speak to you again in January. In the meantime enjoy what's left of the World Series and thank you again for joining us today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.